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Pursuing RePowerEU

29 / 03 / 2022

By Julian Toth, ISFC and Reka Sulyok, EUROPEUM

Editors’ note: This column is a shorter version of a commentary published by ISFC. Read more about the research behind this and download the analysis from here:

In March, the European Commission announced unprecedented actions to double down on the EU’s decoupling from Russian gas imports. The ambitious plan, called RePowerEU, intends to cut back gas imports from Russia by two-thirds this year, and to accelerate the full energy transition envisaged in the European Green Deal before the initial deadline.

We welcome the fast-moving approach the Commission has taken, but we worry about the practicalities and the implementation of the ambitious plans. The energy goals will not be within easy reach for some of the Central and Eastern European (CEE) countries, putting additional pressure on their governments, policymakers, and budgets. To make the RePowerEU plan work, the fiscal framework, EU-level guarantees and supporting policy instruments need to factor in the disparities across the EU Member States. Not only will the coal dependent, fossil intensive CEE countries have a harder time to switch from Russian imports, but the worsening of trade terms, growing inflation, and the proximity of the Ukrainian conflict, all pose a serious threat to their economic outlook.

With limited or no access to alternative gas pipelines for most CEE countries, the only viable option to reduce the dependency on Russian fossil fuels can come from an accelerated development of clean energy sources in the region, coupled with improved energy efficiency and thus reduced energy consumption. This will require a tremendous amount of new capital, both public and private, being efficiently channelled to large-scale renewable energy projects supported by coherent and cross-sectoral policy effort focused on energy efficiency and reducing energy consumption.

When it comes to the unprecedented cutting of Russian gas, there is a palpable East-West division. Western Europe has an easier way out due to its access to liquified natural gas (LNG). Central Europe, however, faces a grave situation. Barring easy access to alternative energy commodities, the short-term adjustment will be costly and demand side restrictions might be required of these countries. Not only does the price shock inflict economic damage on the region, but it is also likely to divert capital investment as risk premiums will increase and sentiment could sour.

The immediate question the European Commission faces is how to set a fiscal framework in place that addresses the disparities between Member States, and that best achieves the necessary redistribution. We see an urgent need for an overarching fiscal framework that reckons with the immediate costs of logistical difficulties for the landlocked members and that of the prompt substitution. To add to the policymakers’ woes, the fiscal frameworks need to find space to mitigate the ripple effect of the outsized energy price shocks that the transition will create.

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